Reclaiming Tax in Drawdown

Sea_Shell

Sorry if this may have been asked before...quick question.

If you have a DC pot of £130,000, and in year 1 you crystalise the lot and take the full 25%, (£32,500) along with your full Personal Allowance of (currently) £12,500, is it correct that you'll be put on an Emergency Tax code, and it'll be treated as a Day 1 deduction, at 40% tax. (£5000). No other income.

As I understand it, this can be reclaimed fairly quickly using a P55 form, correct?

If in year 2 you again draw the max PA at the start of the new tax year, in one go (rather than monthly drawdown) do you have to again complete a tax form, and is it still P55? I'm assuming a lump sum, once a year is NOT classified by HMRC as a "Regular" payment, is that so?

Thanks everyone.
:beer:

*** Edited to add ***
If only claiming small pot pensions, in full, in any tax year, does the same principal apply. Say, you've got a small pot of £8000, so £2000 will be tax free, and you get £6000. Do they take tax, thinking that you'll be getting £6000 per month for the rest of the tax year? Thanks.

SeniorSam

If the pension provider has been notified of your tax code, then they would not take emergency tax. Wise to contact the provider, ask if they have been notified and if not, then get appropriate references and get the tax office to send a notification. Otherwise you will have the emergency tax taken and have to reclaim later.

AnotherJoe

What's the rationale behind taking out the full years allowance in one go?
Is it it that you need that much cash so are thinking to do it over two tax years separated by a few months ?
I think you would likely get taxed on the basis if you'd be taking 12,500 every month and have to claim it back.(the 25% tax free won't come into the calculation)

Sea_Shell

Our 2 main drivers to do it that way is, fees and being able to get it all out ASAP without any tax payable. Let any growth come from reinvestment in ISA.

If we choose a plan that charges per transaction, rather than percentage.

We'd put the money straight into our ISAs, which we can withdraw at will, with no charge.

As for notifying provider of tax code, would a day 1 payment still trigger tax being paid...as they don't know that's all you'd be withdrawing in that tax year?

We're still kicking ideas around at the moment as we can't do anything until this time 2021! But we want to get organised, Sipp sorted and provider decided on in preparation.

ColdIron

Why take the £12,500 in month one? If you take monthly income it will be taxed (or not) evenly

midlandsimon

Pension income is taxed under PAYE as earned income. If your providee had a P45 for the current tax year from your previous pension provider, or if they already have your tax code on file, then they will apply that tax code. If not, then HMRC require them to tax your income using the temporary rate until they issue them with a correct tax code.
The temporary (or emergency) rate for the 2019/20 tax year is 1250L (S1250L in Scotland).
The temporary rate works on what is known as a ‘month 1’ basis. This means that the calculation used will have only allocated 1/12th of your tax free personal allowance to your lump sum. They are required by HMRC to use this calculation even if the lumpsum is the only payment made in that tax year.
If you’ve overpaid tax, your provider is not allowed to make ad hoc tax refunds.
HMRC may decide to tell them to amend the tax on your future income payments to correct your tax position. Alternatively, HMRC could review your tax paid at the end of the tax year and issue a tax calculation to adjust your position. In some circumstances you may be able to make an in year claim to get back any overpaid tax.

If the lump sum payment:
•used up your pension pot and you have no other income, complete form P50Z
•used up your pension pot and you have other taxable income, complete form P53Z
•didn’t use up your pension pot and you’re not taking any more payments from the plan in this tax year, complete form P55
•didn’t use up your pension pot, then any further income payments will carry on being taxed under the current tax code unless HMRC issues your provider with a revised tax code.

Sea_Shell

So can you continue to use form P55 in subsequent years?

It may be that monthly is more straight forward...like I said, we're kicking ideas around.

NoMore

Also interested in this question, as I intend to use my SIPP to only cover 5 years so essentially on commencement of drawdown it will be mostly cash earning almost zero interest in the SIPP. Getting it out ASAP as tax efficiently as possible is my aim.

midlandsimon

Why does the cash have to be earning zero interest in the SIPP. It can remain invested then returned to the cash fund as and when required by the provider.

NoMore

As I said I am withdrawing the whole of the SIPP over 5 years, on a short timescale I don't want to be invested in equities

AnotherJoe

Sea_Shell wrote: »

Our 2 main drivers to do it that way is, fees and being able to get it all out ASAP without any tax payable. Let any growth come from reinvestment in ISA.


But you can leave it invested in the same investments in the pension and withdraw more slowly.


If we choose a plan that charges per transaction, rather than percentage.

Why not choose a plan that doesnt charge at all for withdrawals instead?


We'd put the money straight into our ISAs, which we can withdraw at will, with no charge.
I can take my money out of my SIPP with no charge.



As for notifying provider of tax code, would a day 1 payment still trigger tax being paid...as they don't know that's all you'd be withdrawing in that tax year?

We're still kicking ideas around at the moment as we can't do anything until this time 2021! But we want to get organised, Sipp sorted and provider decided on in preparation.

Where is the money now if its not in a SIPP? Or are you looking to move it to a different SIPP?